Natural gas

Trouble in store

A lack of storage could mean another winter of roller-coaster gas prices

JUNE may seem an odd month to be worrying about winter heating. But businesses around the country were nevertheless relieved when Centrica, once a state-owned gas company, confirmed last week that gas was again being pumped into Rough, a depleted North Sea field which it uses to store natural gas. The field (which accounts for around three-quarters of Britain's total gas storage) had been out of action since a fire in February.

In days gone by, Rough's absence might have gone broadly unnoticed. But the effects of last winter's fire were dramatic. With almost no stored gas available to meet spikes in demand, a cold snap in March caused wholesale prices to quadruple in four days. National Grid, which runs the distribution network, warned—for the first time ever—that it might not be able to match supply with demand.

In the end, no disconnections were needed. But the zooming prices highlighted the paucity of gas storage in Britain, and the risks of relying so heavily on a single, big reserve. Shortly afterwards Alistair Darling, the new trade and industry secretary, introduced planning guidelines designed to speed up the construction of additional gas stores.

Historically, the North Sea's bounty has left Britain with little need to store gas, since shortages could be dealt with by simply pumping faster. But the North Sea's declining production can no longer be relied upon to meet demand (see chart). That leaves Britain's gas stockpiles—around 14 days at peak demand—looking worryingly small, especially compared with those in European countries, which often store two months' worth of gas or more. Ministers had believed that, as the North Sea ran down, new import infrastructure would bridge any gaps. But the events of last winter cast doubt on that idea: expensive import pipelines and liquid natural gas (LNG) terminals stayed obstinately underused even as temperatures plunged and gas prices soared. Mr Darling now says that extra storage is “critical to our national energy security.”

In a liberalised market, private firms should provide storage to take advantage of the difference between summer and winter gas prices. But not everyone is convinced that the market is delivering. Planning problems are one reason: worried residents scotched a planned gas store beneath Lancashire earlier this year, and other projects have faced long delays. Mr Darling's new guidelines should make it harder for planners to refuse applications.

Economics is another reason. Storing gas is expensive, partly because reservoirs need to be pumped full of unrecoverable “cushion gas” to maintain pressure, and partly because storing gas for the future means giving up the opportunity to sell it today. “When prices are low you don't need storage because gas is abundant,” says Andy Morris of ILEX, an energy consultancy. “When prices are high, and you do need it, it's very expensive to build.” Instead firms, like the government, have relied on new import infrastructure to meet most of the winter demand. After last winter, that looks optimistic.

Nevertheless, investment in storage has risen as spreads between summer and winter prices have widened. Ten new projects are planned, which together should double Britain's storage capacity by 2010. But that will be cold comfort to firms and consumers anticipating another tight winter in six months' time. “The market is too slow,” says Jonathan Stern, an analyst at the Oxford Institute of Energy Studies. “By the time it was signalling the need for more storage it was too late.”

The biggest problem, adds Mr Stern, is that markets find it hard to insure against rare, unpredictable but catastrophic events such as an explosion in a pipeline or a terrorist attack—or the fire that shut down Rough. With that in mind, one question being considered by the government's energy review is whether the state should step in and set up a “strategic” gas reserve (something similar already exists for oil).

Such government intervention may be prudent but it could have unintended consequences. Bruce Walker, head of Centrica Storage (which runs Rough), worries that a government-run reserve would be seen by the private sector as a safety net, reducing its incentive to build commercial storage. “The government would have to say that it wouldn't use the reserve unless something really catastrophic happened,” he muses. “But would people believe it?”